Tough pollution rules may cut China's steelmaking capacity by 2pc

The mainland's slowing economy and tougher government anti-pollution efforts are taking a toll on its steel mills, rattling the world's biggest producer of the alloy and sparking worries of a potential downturn in the global iron-ore trade.

Industry researcher Mysteel. com expects 2 per cent of mainland steelmaking capacity will be eliminated this year, and that growth in steel output will slow to 3 per cent, down from 7.5 per cent last year.

The biggest losers may be older, private mills the central government considers to be both inefficient and some of the greatest sources of air pollution. Premier Li Keqiang told the annual meeting of the National People's Congress in March that the government was no longer willing to sacrifice clean air for rapid growth.

As smaller mills are squeezed out, bigger ones including Baosteel and Wuhan Iron & Steel Group win market share, Moody's Investors Service said last week.

"The government aims to wash out small, polluting producers and it wants a reshuffle of the steel industry," said Hu Muzhong, general manager of Central Minerals in Hong Kong.

Mike Henry, president of BHP Billiton's marketing and technology unit, said in February that the anti-pollution moves "will drive consolidation towards more efficient steelmaking capacity in China".

This year as many as 10 plants, with annual capacity of as much as 10 million tonnes, may close or scale back operations, Mysteel chief analyst Xu Xiangchun said. That is enough to "create panic" in the market, he said. The mainland produced a record 779 million tonnes of crude steel last year.

The shrinkage comes as Beijing weighs the heavy environmental price for economic growth. The central government has vowed to introduce stricter environmental-protection laws and to cut loans to heavy emitters and energy users while affirming plans to target overcapacity in industries including steel.

Industry observers are watching to see if the consolidation in an industry that produced about 50 per cent of the world's crude steel in February could upset commodities markets.